Thursday, January 14, 2016

Short Course in Overproduction 2

Brazilian mining giant Vale SA said Tuesday it would borrow $3 billion in emergency financing, a sign of distress from the world's largest iron ore producer.

Vale said the revolving credit line would "increase liquidity and bridge potential cash flow needs." It didn't disclose the interest rate it received, and said another $2 billion was available

Cold feet on a bridge too far:

The miner, which needs capital to pay for expansion projects, is tapping the line of credit partly because it hasn't been able to garner as much as expected through the sale of assets. Banks have gotten cold feet about financing commodities deals amid a deep rout in prices, throwing a wrench into the plans of mining companies to shore up their balance sheets as they struggle to pay for mine expansions undertaken during the boom.

For our British comrades throwing "a wrench into the plans" is the same as throwing a "spanner into the works."

Vale has been unable to obtain project financing to complete a 2014 deal to sell a stake in its Mozambique coal operations to Japan's Mitsui & Co. That transaction, originally scheduled for completion in the second half of 2015, would have boosted Vale's cash flows by $3 billion.

Seeing the parts, bridges and dams, but never the whole:

In addition, Vale faces the stigma of being Brazilian at a time when international capital markets have largely shunned the country's companies amid a sweeping corruption scandal and economic crisis. A major accident on Nov. 5 at Samarco, Vale's joint venture with BHP Billiton Ltd., further rattled investors.

The accident at Samarco was the failure of a tailings dam that inundated villages with mud and water, killing 19 people.

Like BHP Billiton and Rio Tinto Ltd., Vale has invested aggressively over the last decade in building massive new mines and expanding old ones. One reason Vale needs cash is to finish S11D, a $16 billion mine in the Amazon region that will increase its iron ore output by more than 25%.

Creating 2,3, many Samarcos.

The mining majors' strategy was to fully capture the profits generated by China's frenetic steelmaking, while pressuring their competitors with lower prices.

What a plan. Sheer genius:

Instead, demand in China has tapered off, and iron-ore prices have fallen to $40 a metric ton, less than a quarter of their peak in 2011 when many of the mine expansions were ordered up. In addition steel prices around the world have plummeted as China continues to export excess supply.

Overproduction is triggered by the fall in the rate of profit, and the attempt to counteract that fall, through reducing the cost-price of production, and claiming a larger portion of the total available profit. It, overproduction, appears as "excessive exuberance" in pursuit of expanding profits. In reality, overproduction is inherent in, and essential to, capital accumulation. The compulsion to increase the increment of expansion of capital, the increased extraction of surplus value, overwhelms the increment of profit.

What that means is that the big three iron-ore companies have ended up pressuring themselves, squeezing cash flows while they still have bills to pay-- forcing them to borrow money and sell or shut mines.

"They've invested enough capital in these expansions to be past the point of no return [!]," says David Wang of Morningstar, Inc. "So they have to keep spending, but with prices this low, a company's not going to be able to have all its mines operating at a cash profit." Vale has already announced plans to shut production at some of its older mines in southeastern Brazil.

Actually, they have invested enough capital to bring the accumulated capital to the point of no return.

The pain in mining has been widespread. Shares in copper and oil producer Freeport-McMoRan Inc., the US's biggest mining company closed 4.6% lower Tuesday. Freeport has shut mines, laid off workers and cut production. Anglo American PLC is laying off 85,000 workers. Glencore PLC last year secured $15.25 billion in revolving credit.

Vale has been able to get some money. It sold $3 billion in assets last year, including minority stakes in infrastructure assets and a number of gigantic iron-ore ships that it commissioned during the commodity boom.

It is still trying to sell off 11 ships, which have been valued at around $100 million apiece.

...The situation marks a stunning turnaround from just a couple of years ago...

Overproduction is always overproduction of the means of production as capital, as value extracting. The capital accumulated and enlarged, engorged, in the intensified the exploitation of labor power, no longer exploits the labor power intensely enough to maintain that expansion.